AI Drafter 
TaxTMI 
TaxTMI 
2022 (9) TMI 351
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.... Ld.CIT (A) has erred in deleting the disallowance of acquisition cost of participating interests in various blocks amounting to Rs.174,52,34,343/- by not considering the fact that the expression "licences" used in section 32(1)(ii) of the Act applies to licences that are relatable to intellectual properties only and not relatable to all type of licences. 2. On the facts and circumstances of the case and in law, the Ld.CIT{A) has erred in deleting the disallowance of acquisition cost of participating interests in various blocks by not considering the fact that in AY 2002-03, the Hon'ble ITAT has erred in granting relief to the assessee by wrongly invoking provisions of Section 32(1)(ii) of the Act and that the Revenue is already in appeal against this decision before the Hon'ble High Court of Delhi. 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance of acquisition cost of participating interests in various blocks by ignoring the fact that section32(1)(ii) of the Act, has a narrower scope and must be given strict and plain interpretation than what was envisaged and allowed by the Hon'ble ITAT. ....
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....dded. 9. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the claim of the revenues amounting to 1453.31 million has been forwarded by the company to MEM during the year which shows that the revenue has not only accrued but crystallized during the year and the same should have been taken into account for calculation of profits. 10. On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in deleting the disallowance of claim of preacquisition expenses amounting to Rs.79,18,87,613/- by ignoring the fact that pre-acquisition expenses are covered within the scope of section 42 and the method prescribed under section 42 agreement are binding on the assessee as the same are special provisions sanctioned by Parliament and have overriding effect. 11. On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in deleting the disallowance of claim of preacquisition expenses amounting to Rs.79,18,87,613/- by ignoring the fact there cannot be a double claim for the same expense once under any provision of the Act and then u/s 42 of the Act. 12. On the facts and ....
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....angible assets in order to be eligible for depreciation. 5. On this issue, Assessing Officer made disallowance of Rs.174,52,34,343/- on acquisition cost/WDV of participating interest in respect of Sakhalin 1 Project, Block A-I & A-3 Myanmar Project, Sudan Blocks 5A & 5B Projects, Ivory Coast Project, 81-1 Libya Project, Egypt, Qatar, Block 127 & 128 Vietnam Project and Cuba Project. As per the return of income filed, the assessee company has claimed depreciation on acquisition cost of participating interests @25% holding them as intangible assets and the total depreciation claim was to the extent of Rs.174,52,34,343/-. Claim of depreciation was made on various production sharing contracts through which the participating rights were acquired by the assessee company in the above projects. AO following similar disallowance made in A Y 2006-07 held that the expression 'licences' used in see 32(1)(ii) of the Act to apply to licences relatable to intellectual properties only and not to all licences. AO held that u/s 32 of the Act depreciation is not allowed on all capital assets but is allowable on capital assets which fall in any of the categories enumerated in the section. A....
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....3-04, 2004-05 & 2005-06 has upheld the order of the ld. CIT (A) and allowed the depreciation. The ITAT further noted that the Revenue's appeal against Tribunal order for AY 2002-03 has been dismissed by Hon'ble Delhi High Court. Therefore, ITAT held that in absence of any distinguishing feature, the CIT(A)'s order is upheld and the ground raised by the Revenue is dismissed. 8. Ld. DR in this regard submitted that ld. CIT (A)'s order is erroneous and it needs to be seen that whether the assessee company satisfies the required condition of section 32 of the Act or not. He submitted that the provisions of section 32 are not complied herewith. He further submitted that Revenue's appeal for AY 2002-03 was dismissed by Hon'ble High Court not based on the facts of the case as the appeal was dismissed for delay in filing of the appeals. 9. Per contra, ld. counsel of the assessee submitted that the issue is fully covered in favour of the assessee by the aforesaid decisions of ITAT i.e. for AYs 2002-03 to 2005-06. The Revenue's appeals have further been dismissed by Hon'ble Delhi High Court. Further, it was submitted that Revenue did not challenge the order of ITAT in AY 2006-07. Ld. c....
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....ction starts. AO observed that in the case of the projects where the commercial production have not commenced the claim of depreciation is not allowable at this stage but only where commercial production begins. In case of abandonment the entire costs may be allowed over a period of 10 years as per the agreement. As such for the year under consideration the claim of depreciation on support equipments at Myanmar Block A-I & A-3, Libya Block NC- 188, NC- 189, Block 81-1, Iran Farsi Block, Syria, Egypt and Qatar where joint venture projects for which commercial production has not yet started totaling to Rs.95,36,8501- were disallowed by the AO and added to the income of the assessee along similar lines as in A. Y. 2006-07. 12. Ld. CIT (A) decided the issue in favour of the assessee by observing as under :- "4.2.2 From the submission of the Appellant it is evident that the disallowance relates to depreciation on supporting equipments such as computers, vehicles, office equipments etc. that were used by the Appellant for its business purposes. The Appellant is engaged in the business of hydrocarbon exploration prospecting and production for last many years. In the course of ....
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.... in Rajasthan. There is one business. Although the factory at Rajasthan was not set up in the previous year relevant to the assessment year, this fact, in our view, is not a relevant factor in determining whether the deduction is allowable or not. The expenses in this case are miscellaneous expenses and legal charges for the proposed cement factory project. This expenditure is not related to the setting up of a new factory, it pertains to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. The assessee, during the course of its business, may incur expenditure for obtaining a project report or legal opinion regarding the viability of such project. This cannot, in our view, be considered as capital expenditure as, in that case, any legal expenses incurred by an assessee for taking any opinion on the desirability or feasibility of expansion of the business will not be allowable as deduction. Such expenditure is unmistakably connected with the running of the business." 4.2.5 Division Bench of Hon'ble Delhi High Court in CIT V. Goodyear India Ltd. [2000] 243 ITR 239 relied upon Jonas Woodhead an....
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.... the pre-commencement stage. * Each block of participating interest is not a separate business. The assessee is engaged in the business of exploration of crude oil and natural gas and in the process, keeps on acquiring other blocks in other jurisdictions. Thus when it acquires participating interest in other oil block, it is only an expansion of the business in which it is engaged. Support equipments are like other fixed assets and as such depreciation is allowable on cost incurred for acquisition of such assets during the year and also in respect of WDV of other block of assets acquired in the preceding years. * Support equipment are for the purpose of the business and details of related oil blocks are enclosed in paper books. 15. Upon careful consideration, we find that depreciation on these support equipment has already been allowed in earlier year. There is no change in facts or law in this year. Hence, there is no reason why Revenue should change its stand and disallowed depreciation. The case laws referred by ld. CIT (A) as well as the ld. counsel of assessee are germane and support the case of assessee. Hence, the order of ld.CIT (A) is upheld. 16. An....
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.... We have also considered the various decisions cited before us. We find the EPC Contractor executing the project on behalf of the consortium claimed additional costs aggregating to Rs.1659 million from the assessee and, consequently, an amount of Rs.1026.08 million being the assessee's share out of Rs.1140.08 million as approved by ONGC (consultant) was provided in the books of account and was claimed as an expenditure in the return of income. The assessee forwarded the counter claim to its customer, MEM amounting to Rs.1524.20 million (assessee's share being Rs.1371.78 million) which has not been accepted by the MEM. Therefore, the assessee did not consider any revenue on this account in its books of account on the ground that the assessee cannot be said to have acquired any right to receive such income till the time the claim is accepted by the MEM. According to the Assessing Officer, since the project has been completed in the relevant assessment year, the assessee acquired certain right to receive such amount from MEM and the same was taxable in the hands of the assessee on accrual basis and, accordingly, made an addition of Rs.149.31 lakhs to the total income of the assessee. ....
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....n accepted by the MEM for which the company has not considered any revenue in the P & L Account. However, it has made a provision for additional expenses of Rs.1026.08 million being the company's share in the consortium. From the findings given by the CIT(A), we find the additional cost of Rs.1659.00 million company's share being Rs.1493.10 million claimed by the EPC contractor is pending in arbitration in its entirety. The claim of the EPC contractor has not been accepted by the assessee company. Part of the cost of Rs.1524.20 million (company's share being Rs.1371.78 million) claimed by the company has been forwarded to MEM for their approval. It has been clarified before the CIT(A) that no payment has been made by the assessee company to the contractor for which the ld.CIT(A) has given the finding that neither the additional cost claimed by the EPC contractor has been accepted nor any part of it has been paid. Therefore, the CIT(A) held that the liability towards the additional cost claimed by the EPC contractor has not arisen to the company during the relevant year. Thus, we find that while claim made by the assessee to EPC contractor has not been accepted by them, the claim ma....
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....r. Thus, there being no claim made, the addition made was not only misconceived but had inadvertently been made. * In fact, in the notes to accounts for AY 2007-08 to 2014- 15, the Company had reinstated the amount of liability incurred in AY 2006-07 on account of fluctuation in the foreign exchange rate. * The foreign exchange gain/loss arising on account of such fluctuation had been erroneously offered to tax/claimed in the respective A Y s despite the fact that no such sum had accrued. The AO had accepted such claim/income and not raised any issue. * Since the claim made in A Y 2006-07 had not been allowed by ITA T, such foreign exchange gain/loss should have reduced/added to total income as it had been erroneously offered to tax/claimed. * Further, for AY 2006-07, the- Company made a counter claim to MEM which was rejected by the Legal department of MEM. The Company did not book any income during AY 2006-07 to AY 2014-15 on account of such claim as the same was not accepted by MEM and no income accrued to the Company. * However, the AO made an addition of the reinstated value of claim made by the Company to MEM on protective basis in....
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.... consultants, travelling, communication, boarding and lodging expenses etc. AO held that the above claim of pre-acquisition expenses u/s 37(1) to the extent of Rs.79,18,87,613/- is not proper as the same is eligible u/s 42 as per the terms of the agreement. Therefore, AO disallowed the claim being premature and erroneous along similar lines as in AY 2006-07. 24. Ld. CIT (A) was of the opinion that this issue relating to section 37 and not section 32. He noted the following from the ITAT decision and decided the issue in favour of the assessee :- "4.4.3 Similar additions was made in A Y 2002-03 which was deleted by Hon'ble ITAT. In AY 2004-05 and AY 2005-06 similar additions was deleted by Id. CIT(A) following the decision of Hon'ble ITAT. In AY 2002-03 Hon'ble ITAT in ITA No. 472/0/08 in its decision dt. 30.10.2009 while allowing the claim of the assessee held: "With regard to disallowing claim of expenses of Rs.43.85 lacs incurred for purchase and evaluation of the seismic data of foreign blocks, on the plea of same being capital in nature, we found that assessee being engaged in the business of exploration and production of hydrocarbons in other c....
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....no. 3 to 3.2, the alternate ground no. 3.3 as taken by assessee become anfractuous. 16. The expenditure of Rs.5.64 crores incurred on projects pending final approval, even though the said expenditure was written off in the accounts over a period of five years the AO disallowed the same. We have considered rival contentions. The assessee in the instant case has incurred expenses relating to project pending final evaluation. The assessee had made distinction between contract projects for which agreement is entered into and the board approved projects i.e. projects for which no agreement/contract has been entered. The assessee used to capitalize expenditure incurred on projects for which no agreement/contract has been entered, however, the cost of such projects which are abundant was written off over a period of five years in the books of account of the assessee. The assessee had claimed the expenses pertaining to abandoned project as revenue expenses. The expenditure incurred for this purpose was in the nature of travel cost, meeting and conference expenses, delegation, salaries and professional fees etc. These expenditure were claimed by the assessee in its return of income....
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....Delhi High Court in case of BSES Yamuna Powers Ltd. in ITA No.1267 order dated 31.08.2010 wherein it has been held that depreciation on UPS shall be allowed @ 30%. 30. In AY 2005-06, in assessee's own case, the same issue is decided in favour of the assessee by the ITAT. 31. In our considered view, this issue is covered in favour of the assessee, hence the order of ld. CIT (A) is upheld on this issue. 32. Another issue raised from AY 2007-08 relates to allowability of expenses incurred on exploration activities u/s 37 of the Act carried out in Farsi block, Iran under a service contract. 33. Brief facts of the case are that AO erred in making an addition of Rs.121,38,27,143 being the expenses incurred in respect of the exploration activities of Farsi Iran Block. As per schedule 25 (Para 13) of notes on accounts the company in consortium with other partners has entered into an Exploration Services Contract (ESC) with National Iranian Oil Company (NIOC) in respect of Farsi Block Iran. The Company drilled exploratory wells in the block during the year and a provisions has been made in respect of the expenditure incurred on exploratory wells (Rs.1,287.30 million) pending dec....
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....Del)] Hon'ble ITAT Delhi held that settled proposition that when once an outlay is made for the purpose of the business, it need not turn out to be profitable. It is a mistake to suppose that any deductible expenditure must not only be incurred for the purpose of business or trade but must also be profitably laid out. Deductible expenditure incurred for the purpose of business does not require the presence of a receipt on the credit side to justify deduction of an expenses. It is well-settled that expenditure wholly an exclusively for the purpose of business cannot be disallowed merely because the assessee income or the turnover would be very much reduced thereby. In view of the above legal position the disallowance made by the AO cannot be sustained. The appeal is allowed in this ground." 35. Ld. CIT DR submitted that this issue is to be governed by Section 42 of the Income Tax Act and he referred to the decision of Hon'ble Supreme Court in the case of M/s. Enron Oil and Gas India Ltd. (supra). 36. Ld. counsel of the assessee submitted that assessee had entered into an exploration service contract with NIOC for Farsi Block in the year 2002. Under the said contract, all t....
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....se of the assessee. Hence, we uphold the order of the ld. CIT(A) on this issue. The mere reference to section 42 and the decision of the Hon'ble Supreme Court by the Ld. DR does not fructify the case of the Revenue in absence of details submitted as to how they are affecting the issue here. 38. Another issue raised relates to deletion of addition on account of disallowance of prior period income of Rs.33,47,65,000/-. 39. Brief facts of the case are that the assessee has taken plea that AO has erred in making an addition of Rs. 33,47,65,000 as prior period income in respect of 50% of survey expenses written back in relation to Sakhalin project without appreciating that the assessee had not claimed the deduction for aforesaid expense by filing the revised return of income for A Y 2006-07. During the relevant Assessment Year, the assessee had written back liability in respect of 50% of survey expenses in relation to Sakhalin Project. Since the liability was contingent in nature, the assessee has written back the same in its books of accounts for A Y 2007-08. It was further submitted that the assessee in its revised return of income for A Y 2006-07 has given up the claim of deduc....
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....- 07 and deduction u/s 42 was reduced by INR 33,47,65,000. Copy attached at page no. 24 to 32 . * The AO held that no evidence had been furnished to substantiate that the aforesaid sum has been offered to tax in the A Y 2006-07. In fact the revised return of income for A Y 2006-07 has been accepted by the revenue. 43. We find that ld. DR is not disputing the findings of the ld. CIT (A) on this issue but only wants the matter to be remitted to AO for verification. We find that the matter has already been examined by ld. CIT(A) and has passed a cogent order. No infirmity therein has been pointed out to persuade us to remit the matter to AO, hence we uphold the order of ld. CIT (A). 44. Another issue relates to AY 2009-10 relating to revision of opening and closing stock. 45. On this issue, ld. CIT (A) has dealt with the assessee's request that since the value of closing stock has been increased in AY 2008-09, in AY 2009-10 the value of opening stock should also increase. The ld. CIT (A) has noted the assessee's submissions as under :- "3.27.1 In the audited accounts for the financial year (FY) 2007-08 relevant to the assessment year (AY) 2008-09, the closin....
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....pany of valuation of closing stock' has also been accepted by the Comptroller and Auditor General of India. Therefore, the assessee had reduced the closing stock of AY 2008- 09 by INR 56.61 million and the corresponding opening stock of AY 2009-10 was shown at the reduced value. * The AO did not accept the contention of the assessee and assessed the closing stock of AY 2008-09 at a higher value including the aforesaid sum. The assessee has accepted the higher value of closing stock in AY 2008- 09. * CIT(A) had directed the revenue to adopt the said increased value of closing stock as .the opening stock for the AY 2009-10. * The assessee had accordingly requested the revenue to provide the benefit of increased opening stock in AY 2009-10 which has been allowed by the CIT(A) in the AY 2009-10 and the affect to same has also been provided. 48. Ld. CIT DR in this regard submits that the issue involves factual issue and may be remitted back to the file of AO. 49. We find that ld. DR has not disputed the CIT (A)'s finding and he is only submitting that this is a factual issue and may be remitted to AO. We find that this is exactly what ld. CI....
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.... as under :- "The Appellant vide an assignment agreement dated February 10, 2001 with Consortium members and the Russian Government acquired a 20% participating interest in Sakhalin Block Russia. As per the Production Sharing Agreement (PSA), the consortium has liability of site restoration and for this purpose shall establish an account (Abandonment Account) and begin making a monthly contribution to the Abandonment Account following the initial sale of Hydrocarbons, succeeded by cost recovery. The amount of monthly abandonment contribution is calculated by multiplying the monthly production volume from each Development Area by an abandonment cost per unit of production. Accordingly, the Appellant has contributed Rs.60,219,264 towards abandonment liability for the months June 2008 to January 2009 as per monthly contribution notice of operator (ExxonMobil)/Foreign Party Administrator (JP Morgan Chase Bank, UK). In the books of accounts, the Appellant created a provision for abandonment liability of Sakhalin project (Block) by debiting 'Producing Property A/c' (Schedule 5 of Financial Statements) under assets side. Therefore, there is no impact on Profit & ....
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.... 493,456 credited to site restoration fund as interest was not in the nature of income or alternatively the same is to be treated as amount of contribution to the fund and hence is not taxable. 8.6 That the Ld. AO has erred in not considering the claim of the appellant, filed during the assessment proceedings, that the amount of Rs.6,998,554 credited to site restoration fund as foreign exchange fluctuation on account of restatement was not in the nature of income or alternatively the same is to be treated as amount of contribution to the fund and hence is not taxable. Further, in addition to above, the Appellant has raised the following additional ground vide its letter dated 22.05.2014: On the facts and circumstances of the case and in law, the deduction of Rs.2,60,58,542/- being the amount of contribution for the month of February 2009 & March 2009 on account of abandonment liability of Sakhalin Project deposited with JP Morgan Chase 8ank should be allowed as deduction under section 37 of the Act in assessment year 2009-10. The above additional ground has been raised by the Appellant on the premise that the Appellant being a Company is required....
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....he end of the period. The deposit is payable in the future years and no liability to pay has been incurred during the year. The agreement clearly states that there is no finality of the amount that the assessee is liable and shall only be determined at the conclusion of the contract. 9.3 The Ld. CIT(A) allowed the claim of the assessee by holding as under: "12.8 It is relevant to note that the AO has not doubted that the appellant has to incur this liability. The issue is whether it will be allowed as an expense in this year or in the future years. 12.9 The expenditure is clearly for business purposes and it has been incurred during the year. The appellant cannot get back any amount from the fund. The amount has been incurred for the purpose of business." The ld. CIT(A) has failed to decide the issue whether the expenditure claimed by the assessee is provisional in nature or not. This is also fortified by the fact that the foreign exchange fluctuation gain earned by the assessee has also been claimed as an expenditure. Reliance is also placed on the relevant clauses of the agreement wherein the assessee is required to contribute to the abandonmen....
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.... funds. 60. The assessee had maintained the TP Documentation for establishing the arm's length nature of its above mentioned international transaction. The appellant applied Comparable Uncontrolled Price ('CUP') method as the most appropriate method. Since the loan was a short term loan for 146 days only and was repaid during the year itself, the appellant had compared the interest rate charged to the average 6- month LIBOR rate prevailing during the year i.e. 0.59%. 61. Since, interest earned by the appellant was from ONGC Caspian of 2.5% (LIBOR plus 1.91 %) was higher than the average 6-month Libor rate, the appellant concluded its international transaction of interest income earned from loan given to ONGC Caspian to be at arm's length, as prescribed under the Indian Transfer Pricing Regulations ('TP Regulations). 62. Further, during the course of assessment proceedings, the appellant, vide its submission dated January 16, 2015 submitted to the TPO an additional benchmarking analysis conducted using Loan Connector database. In the said submission the appellant submitted that the effective interest rate paid by the comparable companies was 1.40% (average 6....
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....mparable transactions. Assessee stated before the ld. CIT (A) that the loan in the name of above companies were taken in the last financial year and were long term loans as compared loan given by it to ONGC Caspian which was a bridge loan for less than 6 months and which was paid during the year. Ld. CIT(A) further accepted that the analysis conducted by the assessee using the loan connector database supports the contention of the assessee that the interest rate was at arm's length, hence ld. CIT (A) directed the AO/TPO to delete the adjustment made on account of loan advanced by the assessee to ONGC Caspian. 66. Against the above order, the Revenue is in appeal before us. 67. We have heard both the parties and perused the record. We agree with the ld. CIT (A) that the TPO has applied erroneous and non-comparable search to benchmark the loan transaction. Further assessee has also submitted additional benchmarking analysis using the loan connector database which also compared well with the rate of interest arrived by the assessee. The TPO has used the data regarding loans which pertains to earlier years where the loan was for a period of 3 years. As the loan given by the asses....
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....oan provided to Jarpeno and accepted the interest rate charged by the assessee @ 4% at arm's length. Ld. CIT (A) in this regard relied on the CIT(A)'s order for those years and found that it has rejected the transfer pricing adjustment made by the TPO by relying upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd. (ITA 233/2014) wherein it was held that loan in foreign currency extended to AEs should be benchmarked using the Libor. Ld. CIT (A) extensively quoted from the order of CIT (A) for AYs 2010-11, 2011-12 & 2012-13. Referring to these two years, ld. CIT (A) concluded as under:- "13.21 However, the TPO has applied the WACC method to calculate the arm's length price of interest which is different from the method applied by the TPO in the year under reference. However, the CIT(A) in his order for AY 2012-13 extracted above has discussed the issue why both internal and external CUPs used by the appellant need to be rejected. The same view holds in the instant year also. 13.22 In the instant year, the TPO has taken the arm's length rate of interest as the rate charged by SBI at LIBOR plus 4.5% for entities wi....
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....o i.e. LIBOR plus 3% as mentioned at page 15 of the order of the TPO dated 26.10.2016. The ground of appeal is disposed off accordingly. 7.5. The material facts of the case are the same in the instant year also. In accordance with the principle of consistency and respectfully following the orders of the CIT(A) in AYs 2010-11, 2012-13 and 2013- 14, the AO/TPO is directed to calculate the arm's length interest at LIBOR plus 3%. The AO/TPO is also directed to verify the value of LIBOR after taking the contention of the appellant into consideration. In view of the order of the CIT(A) in AY 2012-13, the AO/TPO is also directed to apply 6 months LIBOR rate for benchmarking receipt of interest from Jarpeno. The ground of appeal is disposed off accordingly. 77. Since, we have already upheld the order of the Ld. CIT(A) for AY 2013-14 facts being similar, this order of the Ld. CIT(A) is also upheld on the same reasoning. 78. On loan to ONGC (BTC) Ltd., the TPO had made transfer pricing adjustment of Rs.2,06,88,027/- in computing the interest on the loan, the TPO applied interest rate of LIBOR plus 4.5% instead of 4% applied by the assessee. 79. Upon assessee's appeal, the L....